By letter dated March 26, 2003, ***, Chairman and Chief
Executive Officer of [Bank] (the “Bank”), requested a change to the Bank’s
assessment risk classification for the January 1, 2003 semiannual assessment
period. The request was denied by the Federal Deposit Insurance
Corporation’s (“FDIC”) Division of Insurance and Research (“DIR”) on April
25, 2003. The Bank appealed the DIR’s determination to the FDIC’s Assessment
Appeals Committee (“Committee”) by letter dated May 22, 2003.
At a meeting held July 21, 2003, the Committee reviewed
the Bank’s appeal. After carefully considering the issues raised by the
Bank, the Committee has concluded that the Bank’s appeal must be denied.
The Bank is challenging its assignment by the FDIC to
supervisory subgroup (“SS”) “1B.” The assignment was based, in part, on a
May 28, 2002 examination conducted by the Office of Thrift Supervision (“OTS”),
the Bank’s primary federal regulator, with FDIC participation. This was the
last examination transmitted to the Bank before the September 30, 2002 SS
Supervisory subgroup assignments are made in accordance
with the FDIC’s regulations, specifically, 12 C.F.R. §
section requires the FDIC to consider supervisory evaluations provided by an
institution’s primary federal regulator and other relevant information in
making these assignments.
Under guidelines set forth in
the FDIC assigns a supervisory subgroup to each institution for each
semiannual assessment period based on a variety of factors, including FDIC
review of the last examination finalized and transmitted to the institution
by the primary federal regulator on or before the cut-off date. The FDIC’s
review may also include: other written findings that result in a composite
rating change by the primary regulator; FDIC examinations finalized on or
before the cut-off date; results of offsite statistical analysis of reported
financial statements; or other pertinent information. Under the FIL, the
cut-off date for the January 1 assessment period is the preceding September
30. The FIL expressly states that the cut-off date refers to the date the
written composite rating is transmitted to the institution and not to the
examination “as of” date, the date of financial statements used in the
examination, the starting or closing date of the examination, or the date of
The FDIC Board of Directors (“Board”) addressed the need
for cut-off dates in a 1993 rulemaking in which it called “strict
application” of the cut-off date “the fairest approach.” 58 Fed. Reg. 34357,
34359 (June 25, 1993). The Board articulated three bases for this view.
First, the approach is fair to all institutions and to the deposit insurance
funds. Whether upgraded or downgraded after the cut-off date, no insured
institution will see the effect of that change until the next semiannual
period. Cut-off dates also protect the deposit insurance funds, since it is
likely that only upgraded institutions would ever seek reclassification of
their SS assignment. Second, if changes finalized after the cut-off date
were considered, assessment notices would, in effect, become preliminary
notices subject to later revision for potentially hundreds of institutions.
Finally, the cut-off date preserves needed predictability for the risk-based
assessment system. In endorsing strict application of cut-off dates, the
Board allowed for exceptions only in “unusual circumstances.”
To ensure greater fairness in the application of cut-off
dates, and to allow consideration of unusual circumstances, the FDIC
continues to look at the information referred to in FIL-30-2000 for a period
of approximately six weeks after the cut-off date, in what is known as the
reconcilement period. Institutions whose risk profile might have changed
since their last examination can be subject to upgrades or downgrades, as
more recent examination information may reflect, during the reconcilement
period. Based upon certain factors, institutions may be flagged for review
during the reconcilement period, although flagging is not a prerequisite for
changing an institution’s rating during that period.
Thus, under the guidelines set out in the FIL, the FDIC
looks to see whether examination results were transmitted in writing to the
institution prior to the cut-off date, unless an institution is reviewed
during the reconcilement period or there is evidence of a change that is
confirmed by an ongoing examination during that period.
The Bank contends that its assessment risk classification
improved from “1B” to “1A” for the January 1, 2003 semiannual period. These
improvements, according to the Bank, began prior to the September 30, 2002
cut-off date, and continued thereafter, with a “dramatic” decline in the
level of classified assets occurring between September 30, 2002 and December
31, 2002. In the Bank’s view, this is not indicative of an institution that
exhibits risk to the deposit insurance funds and therefore it should not
have been assigned an SS classification of 1B. The Bank seeks an exception
to the September 30, 2002 cut-off date so that subsequent alleged changes to
the Bank’s condition can be given “due consideration” by the FDIC.
The Committee finds no basis on the merits of the Bank’s
appeal for the relief it requests. The most recent examination was begun by
OTS on May 28, 2002, completed on August 7, 2002, and transmitted to the
Bank on August 27, 2002. The FDIC participated in the examination and
concurred with the “3” composite rating assigned by the OTS. No other
examination was in process that would have led to a review or upgrade of the
Bank’s SS classification prior to the September 30, 2002 cut-off date or
during the October 11 – November 15, 2002 reconcilement period.
Moreover, the Committee cannot concur in the Bank’s
contentions regarding its condition prior to and after the September 30
cut-off date. Problems appear to have existed from the cut-off date through
the reconcilement period, and, indeed, the Bank’s net income was negative at
the end of the first quarter of 2003.
To grant the Bank the relief it requests would conflict
with the evidence of the Bank’s actual condition during the relevant period
and would disregard consistent FDIC policy and practice concerning
application of the cut-off date.
Finally, the Committee notes that the Bank did not address
the finding that its request for review was filed late. Although the
procedural defect of late filing constitutes additional grounds for denial
of the Bank’s appeal, the Committee has extended to the Bank full
consideration of the merits of its arguments on appeal.
The Committee has carefully considered all of the
submissions made in this matter. Accordingly, for all of the reasons set
forth above, the Bank’s appeal is denied.